Japan prepares bank rescue package

The bad-loan charges are piling up at Japan's banks

Japan has seen a bank fail for the first time since 1999, as the government stands ready to help.

In a move which could have implications across the Japanese financial sector, Finance Minister Masajuro Shiokawa said that an outright collapse would not be permitted.

"We will not allow the failure of financial institutions to spread," Mr Shiokawa told reporters.

After rumours throughout the Japanese financial community, Ishikawa - a second-tier regional bank - today filed for bankruptcy, the first mid-level bank to do so since 1999.

The Financial Services Agency uncovered a hole in the bank's books after a routine investigation.

The government is extending special loans to the bank to protect its depositors - but not to recapitalise it.

Like the whole of Japan's financial sector, Ishikawa is bowed under a huge weight of bad debts.

Despite a government-sponsored clean-up programme, the debts are piling up faster than they can be removed from balance sheets, and could total as much as 200,000bn yen ($1,520bn)

Secure?

Bad loans/core bad loans at end Sept 2001 (bn yen)

Mizuho:
5,580/3,060

Yasuda Trust:
547.05/329.12

Sumitomo Mitsui:
3,330/2,220

Mizuho:
5,580/3,060

Mitsubishi Tokyo:
4,640/2,580

UFJ Group:
2,890/1,860

Asahi:
1,290/810.4

Daiwa:
898.79/439.09

Sumitomo Trust:
604.03/455.71

Chuo Mitsui:
925.8/413.5

NB: Core bad loans are those where the debtor is bankrupt or at risk of bankruptcy

Japanese banks were traditionally seen as invulnerable.

The cornerstone of the Japanese economic miracle in the immediate years after World War II, the banks helped companies and bureaucrats deploy capital to meet national growth targets.

But come the 1997 Asian currency crisis, banks went bust for the first time.

A collapse at Ishikawa would trigger fears of a domino effect.

The Financial Services Agency is attempting to visit every bank before April, when full deposit protection by the government is set to expire.

Before that, though, reports in the Yomiuri Shimbun newspaper suggested that February would see the start of a government programme to start buying banks' vast share portfolios.

Observers have blamed the slump in valuations of assets such as shares and property for helping push the banks to the edge of financial ruin.

Widespread cross-shareholdings with debtor companies were, with real estate portfolios, used as collateral for loans, and unwinding the complex networks of holdings is viewed as a priority for setting the scence for a revival in banking prosperity.